Understanding Hospital Financing: Takeaways from the CHIR Webinar Series

Over the last several months, CHIR hosted the webinar series Understanding Hospital Financing. This three-part series provided lawmakers and other health care stakeholders with insight into what drives hospital finances, how hospitals are funded, and the policy challenges and opportunities to control hospital costs. The series was moderated by CHIR’s Sabrina Corlette, and presenters included Tyler Brannen, an economist at BerryDunn, and CHIR’s Christine Monahan, as well as several state legislators and regulators: Colorado Representative Kyle Brown, Washington State Representative Nicole Macri, and Kim Cammarata of the Maryland Office of the Attorney General. A recording of each webinar and the accompanying slide decks can be found here. 

Throughout the series, we received a number of questions related to hospital margins, financial data, facility fees, community benefit, and the Maryland All-Payer model. Time constraints prevented live answers to these questions, so we provide further insights here.

How can hospital financial health be assessed? What are the strengths and weaknesses of publicly available data on hospital financials?

Hospital financial health encompasses multiple financial measures: margins, liquidity, debt capacity and solvency, capital investment, and financial burden. When broken down into operation and total margins, these measures can provide a general sense of how the hospital or health system spends its dollars. Operating margins reflect spending typically associated with hospitals, such as patient services (care provided) and non-patient services (cafeteria sales, rental facilities, etc.). Total margins encompass patient and non-patient services as well as other revenue and expenses, like investments which can include capital investments (facilities), stock portfolios, and private equity funds. For the most accurate appraisal of a health system’s financial health, margins should be examined across multiple years of data, be reviewed alongside other measures, and be analyzed across facilities within the system.

Similarly, for the most accurate assessment of financial health, multiple sources of data should be examined and include several years of data to gain. Data can be found in several public sources, including but not limited to Medicare Cost Reports, IRS Form 990, and Audited Financial Statements (AFS). Each source has benefits and shortcomings. AFS are considered the gold standard because they require external audits and include detailed information on multiple financial measures. Publicly available tools – the National Academy of State Health Policy’s (NASHP) Hospital Cost Tool and Sage Transparency 2.0 – can also help to analyze hospital spending and financial measures. 

For more information on financial measures and data sources, refer to CHIR’s recent one-pager, Five Key Questions About Hospital Finances.

What are facility fees? What action have states taken to reform facility fees?

Facility fees are billed charges that cover the operation expenses of health care services in a facility. Facilities submit these fees separately from professional service fees for providers. Evidence indicates that facility fees vary by geography and increase spending, premiums, and out-of-pocket (OOP) costs for consumers, without commensurate gains in quality. Furthermore, separate hospital and professional bills can lead to separate cost-sharing for patients, which can cause confusion and lead to higher costs depending on the patients’ insurance carrier and type.
Consequently, many policymakers are concerned by facility fees. To shield consumers from these unnecessary costs, several states have implemented novel reforms, such as facility fee billing prohibitions, increased transparency (billing, ownership, reporting disclosures), and cost-sharing protections. These reforms have varying impacts on patients’ OOP costs, overall system costs, and government oversight. Colorado, Connecticut, and Indiana are leading the way in facility fee reform.

How are finances different for non-profit and for-profit hospitals? What is the role of community benefit?

As opposed to for-profit hospitals and health systems, non-profit hospitals receive tax exemptions for their obligation to provide community benefits. To receive this exemption, non-profit hospitals must file the IRS Form 990 to demonstrate their compliance with the community benefit criteria, which can include community health needs assessments, financial assistance, and/or charity care. These requirements are set at the federal level, though half of states have imposed additional criteria. 

Too often, hospitals are not meeting community benefit or charity care requirements, nor are they fully complying with the expectation to accurately complete and submit the IRS Form 990. Furthermore, charity care only represents 1.4 percent of operating expenses for non-profit hospitals. As more than half of community-based hospitals are non-profit, the paucity of investment in community benefits provided by hospitals raises concerns that non-profits may be taking advantage of their tax exempt status. With an estimated $30 billion a year in tax exemptions, improper use of these financial advantages poses significant risk to cost containment.

Though there is variation across non-profit hospitals and health systems, these dynamics are important to keep in mind when evaluating the financial health of non-profit and for-profit providers.

What is the Maryland All-Payer Model? Has it successfully contained costs?

Maryland has taken a unique approach to hospital payments with an All-Payer Model, which was succeeded by the Maryland Total Cost of Care Model (TCOC). The Maryland model set rates for all payers across hospital services, holds the state fully at risk for the cost of Medicare beneficiaries’ care, and establishes a global budget that limits all-payer per capita hospital growth to 3.58 percent.

Maryland has the only all-payer hospital rate regulation in the country. Evaluations of its successes and shortcomings are mixed. Some evidence indicates that Maryland’s total spending has decreased, but Maryland remains on the higher end of spending compared to other states. Maryland’s Health Services Cost Review Commission noted success in reducing expenditures and revenue growth, but CMS has recognized that there is still room for improvement. The all-payer model poses an interesting option for states to consider, though feasibility will vary among states.

To learn more from experts on the dynamics in hospital finances and policy reform, be sure to watch the recorded webinars, available here.